Q4 Earnings Season Winding Down
The Q4 earnings season isn’t over yet, with almost 400 companies releasing results this week, including 41 S&P 500 members. But the bulk of the reporting season is now behind us, giving us a good enough sense of how good, or otherwise this reporting season has been.
We are sticking with our overall take that the Q4 earnings season has been good enough; it has certainly been no worse than other recent quarters. In fact, this earnings season is better than recent quarters in terms of earnings growth and positive surprises, both EPS and revenue surprises. Where it’s no different from other recent quarters is in terms of lackluster top-line growth and continued negative guidance.
In other words, we didn’t see any improvement on the guidance front, which has been weak for more than a year now. And this is prompting estimates for the current quarter to come down, as the chart below shows.
With companies in the retail sector starting to report fourth quarter results in greater numbers this week and beyond, we will likely see even more negative guidance. They don’t even need to try very hard to explain their dire straits – they can safely blame everything on the weather. Wal-Mart (WMT) which reports on Thursday had already pre-announced its Q4 problems, but we will likely see a lot more negative guidance from other retailers in the coming days. Total earnings for the sector are expected to be down -4.6% in Q4, which is a material downgrade from the +1.1% growth expected at the start of the reporting season.
Q4 Earnings Scorecard (as of Friday, 2/14/2014)
Total earnings for the 401 S&P 500 members that have reported already, combined accounting for 86.2% of the index’s total market capitalization, are up +11.1% from the same period last year, with a ‘beat ratio’ of 68.6% and a median surprise of +2.4%. Total revenues are barely in the positive column, up only +0.8%, with a revenue ‘beat ratio’ of 61.1% and a median surprise of +0.8%.
More companies have beat earnings and revenue expectations than has been the case in recent quarters, as the chart below shows. Perhaps expectations had fallen a bit low ahead of the Q4 reporting season.
The earnings growth rate for these 401 companies is better than what we saw from this same group of companies in Q3 and the 4-quarer average. A big contributor to the strong Q4 earnings growth is easy comparisons for three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV). Exclude these three companies and total earnings growth for the S&P 500 companies that have reported drops to +6.9% from the ‘headline’ +11.1%, which is about where growth has been in recent quarters.
The revenue growth rate is notably weak, but that’s primarily because of the Finance and Energy sectors.
Prudential Financial (PRU) had an unusually large top-line gain in the year-earlier quarter and is a big reason for the Finance sector’s -8.9% drop in reported revenues. Excluding these two sectors, total revenue growth for the S&P 500 improves to +4.2%, which compares to +4% gain for the same group of companies in Q3 and the 4-quarter average of +2.5%. What this means is that top-line growth is weak, but it’s not as weak as the ‘headline’ +0.8% gain would make you believe.
The Composite Growth Picture
The ‘composite’ picture for Q4, where we combine results from the 401 companies that have reported already with the 99 still to come, is for growth rate of +9.2%. This will be the highest quarterly growth pace of 2013, with easy comparisons playing a non-trivial role in propping up the growth pace. The +9.2% growth rate compares to +5.0% in Q3 and +4% in Q2.
Finance remains a big growth driver in Q4 – total earnings growth for the S&P 500 in Q4 drop to +6.1% once the sector is excluded. Energy continues to be a drag on aggregate growth, with total earnings for the sector expected to be down -10.3% in Q4 after declining -8.4% in Q3. Excluding the Energy sector, total Q4 earnings for the S&P 500 would be up +12.1% vs. +6.9% in Q3.
Technology earnings are expected be up +4.5% after the +5.6% gain in Q3. While Google (GOOG) and Facebook (FB) did extremely well, the sector overall has had a good earnings season as well. With Q4 results from 93.7% of the sector’s total market capitalization already out, total earnings for the sector are up +5.6% on +5.2% higher revenues. These growth rates aren’t materially different from what we saw from this same group of companies in Q3, but the beat ratios are notably better, indicating that expectations may have fallen a bit too low in the run up to the start of the reporting season.
Of the Tech sector companies that have reported already (57 out of 65 Tech sector companies in the S&P 500 accounting for 93.7% of the sector’s total market cap have reported results), 86.0% have beat earnings expectations, up from Q3’s 70.2% earnings beat ratio and the 4-quarter average of 75.4%. Positive revenue surprises have been materially widespread relative to recent quarters as well, with Q4 revenue beat ratio currently tracking 75.4% vs. 61.4% in Q3 and the 4-quarter average of 57.0%.
Lack of corporate capital spending has been an issue for the sector for some time and the consensus view is that we will see a turnaround on that front later this year. We haven’t heard anything yet that will add to our confidence in that expectation. But this optimistic view is a big contributor to the expected upturn in the Tech sector’s growth estimate later this year. Total earnings for the sector are expected to be up +10.2% this year and +11.0% in 2015, pronounced acceleration from the flat reading in 2013.
For a more detailed look at the Q4 earnings season, please check our weekly Earnings Trends report.
Guidance Still on the Weak Side
For obvious reasons, the market’s focus has been on management guidance. Companies typically provide guidance only for the following quarter, but they do tend to discuss their outlook for the coming year on the Q4 earnings calls.
What we saw on the guidance front didn’t show any improvement from what we have been seeing for quite some time – companies are still guiding lower. The ongoing emerging market turmoil is only adding to this lack of visibility. We have seen this start to show up in negative estimate revisions for Q1 and beyond, as earlier referred to. But estimates will likely have to come down more if current trends persist.
- Presidents Day, Market Closed.
- We will get the February Empire State regional manufacturing survey before the market opens, while the homebuilder sentiment index will come out a little later. We will likely see weather play roles in both readings, as has been in the norm in all recent economic data.
- Coca Cola (KO) and Medtronic (MDT) are among the notable reports in the morning, while Herbalife (HLF) and